₹9.70 lakh cr FCNR(B) deposits related surplus: RBI weighs absorption options

The central bank is currently evaluating the most effective methods to sterilize the massive liquidity surplus.
| Photo Credit:
SUKREE SUKPLANG

In response to a massive surge in banking liquidity, which has hit ₹9.70 lakh crore, senior Reserve Bank of India (RBI) officials held a meeting with the treasury heads of major banks on Thursday.

Key Takeaways

• RBI officials met bank treasury heads after banking system liquidity surplus hit Rs 9.70 lakh crore.
• The surplus stems from RBI’s concessional swap window (June 8-August 31, 2026) letting banks convert 3-5 year dollar deposits into rupees.
• RBI is weighing sterilization tools including a temporary CRR hike, G-Sec OMO sales, Market Stabilisation Scheme bonds, and structured VRRR auctions.
• DBS Bank’s Radhika Rao said inflows from FCNR(B), ECB and OFCB channels will continue shaping the liquidity outlook.

According to sources, the objective of the meeting was to gather perspectives from market participants regarding the current and evolving liquidity landscape.

This substantial surplus stems from the RBI’s decision to offer a concessional swap window to banks between June 8 and August 31, 2026. This window allows banks to convert fresh dollar-denominated deposits of 3–5 years into rupees.

To manage this excess, the central bank is analyzing various sterilization strategies. Potential tools under consideration include a temporary increase in the Cash Reserve Ratio (CRR), Open Market Operations (OMO) through the sale of Government Securities (G-Secs), the issuance of bonds or bills via the Market Stabilisation Scheme (MSS), and the establishment of a structured calendar for Variable Rate Reverse Repo (VRRR) auctions.

Radhika Rao, Executive Director and Senior Economist at DBS Bank, noted: “Because of the swap arrangement, inflows from FCNR(B) deposits, ECB, and OFCBs will bolster an already high level of rupee liquidity, which reached a four-year peak this month and has been driving down overnight rates.”

“While factors such as seasonal currency leakage, tax-related outflows, portfolio outflows, the Current Account Deficit (1.1% of GDP), and the maturity of the forwards book may provide some natural balance, active intervention will still be necessary to drain the potential liquidity spike.”

Short-term strategies

Rao suggested that near-term interventions could involve a temporary CRR hike—scaled to match the increase in bank deposits—or using OMOs and the MSS to mop up funds without disrupting the FX forward curve, though this might increase yields. Other options include using cash management bills to address temporary mismatches or implementing a calendar of money market operations, such as VRRRs, with shorter tenors.

In a recent report, Barclays estimated that approximately ₹7.5 lakh crore of the liquidity overhang must be managed.

“We anticipate a combination of ongoing variable reverse repo rate (VRRR) operations and an incremental cash reserve ratio (ICRR) hike. Additionally, festive season currency demand (September–November) and forex interventions will help absorb liquidity,” the report stated.

“We do not foresee permanent measures like an indefinite CRR hike, OMO sales, or the MSS. While retiring maturing dollar forwards could simultaneously address the surplus and the impending large-short forward book build-up, the RBI must carefully evaluate the implications of such a move.”

VRRR Auction Results

As part of its efforts to absorb excess liquidity, the RBI conducted two Variable Rate Reverse Repo (VRRR) auctions this Thursday.

In the first overnight VRRR auction, aimed at draining ₹6 lakh crore, the central bank accepted offers totaling ₹5,18,742 crore at a weighted average rate (WAR) of 5.24%.

The second overnight auction, valued at ₹1.50 lakh crore, saw the RBI accept offers totaling ₹34,652 crore, also at a WAR of 5.24%.

The RBI is scheduled to hold a 3-day VRRR this Friday to target the absorption of ₹7 lakh crore in surplus liquidity from the banking system.

Published on September 3, 2026